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Y = C + + G + NX replacing the values of C, I, G and NX in the equation above: Y = 100 + 4/5Yd + 300 - 20i + 120 - 20 Yd = Y - Taxes, Taxes = Y/4 Yd = 3Y/4 Therefore, 2Y/5 = 500-20i (equation 1) Money sectore: Real money demand = Real money supply = M/P Y/3 + 200 - 10i = 350 or y/3 = 10i + 150 (equation 2) Solving these 2 equations: Y = 750, i = 10 a) Consumption = 100 + 4/5Yd = 100+ 3/5Y = 550 Money demand = Y/3 + 200 - 10i = 350 b) New government expenditure = 160 + 120 = 280 The equations are now given by: 2Y/5 = 660-20i (equation 1) Y/3 = 10i + 150 (equation 2) Y = 900 and i = 15 Initially investment was = 300 - 20i = 100 Now the investment = 300 - 20 x 15 = 0 Therefore, the entire investment is crowded out (=100). c) M' = 1100 The equations are now given by: 2Y/5 = 500 - 20i (equation 1) Y/3 = 10i + 350 (equation 2) Y = 1125 and i = 2.5 Change % in Y = 50% Change % in i = -75% Y = C + + G + NX replacing the values of C, I, G and NX in the equation above: Y = 100 + 4/5Yd + 300 - 20i + 120 - 20 Yd = Y - Taxes, Taxes = Y/4 Yd = 3Y/4 Therefore, 2Y/5 = 500-20i (equation 1) Money sectore: Real money demand = Real money supply = M/P Y/3 + 200 - 10i = 350 or y/3 = 10i + 150 (equation 2) Solving these 2 equations: Y = 750, i = 10 a) Consumption = 100 + 4/5Yd = 100+ 3/5Y = 550 Money demand = Y/3 + 200 - 10i = 350 b) New government expenditure = 160 + 120 = 280 The equations are now given by: 2Y/5 = 660-20i (equation 1) Y/3 = 10i + 150 (equation 2) Y = 900 and i = 15 Initially investment was = 300 - 20i = 100 Now the investment = 300 - 20 x 15 = 0 Therefore, the entire investment is crowded out (=100). c) M' = 1100 The equations are now given by: 2Y/5 = 500 - 20i (equation 1) Y/3 = 10i + 350 (equation 2) Y = 1125 and i = 2.5 Change % in Y = 50% Change % in i = -75%

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